Archive for April 2011
by Monty Guild
Posted originally April 29 2011
A MESS BY ALL ACCOUNTS – AND SEEMINGLY GETTING MESSIER. As we have been saying for some time, U.S. economic growth is stuck in the slow lane. Very slow lane. There are few signs of any significant lane changing ahead. We have seen a serious slide in the American standard of living over the past three years, since the beginning of the recession. The slide can be measured in many ways. Food stamps recipients have increased by 48 percent and the cost of the program ballooned by 80 percent Medicaid recipients are up 17 percent and program costs are up 36 percent. Welfare recipients are up 18 percent, and program costs up 24 percent. That isn’t the kind of growth that’s good for any economy!
Looking ahead, we expect the standard of living decline to continue for up to another seventeen years. Our economy and society are substantially changed, but the change to date is moderate compared to the magnitude of change ahead. In 2018, the U.S. will be a much poorer country than it was in 2008.
We envision the average family spending a higher percentage of income on food and shelter. People will retire at 75 years of age… not 65. Many may not be able to retire. Many retirees will have to re-enter the work force as their savings and pensions are diminished in buying power. The streets will be filled with more poor and homeless. The dollar will continue its decline. Gold and other commodities will continue to rise in price. All of these are symptoms of a decline in the public’s standard of living. Unfortunately, we expect it to last for quite a while.
If it is any solace, the U.S. does not stand alone in the economic muck. Japan has been going through the doldrums for almost twenty years now and that sorry state of affairs will likely continue for another decade. Europe’s standard of living is moving in lockstep with the U.S. We give the Europeans, like the U.S., a poor seventeen year prognosis. To us, it looks like the developed world is ‘un-developing.” By 2020, expect to see a more humble developed world, viewing itself differently, playing a lesser leadership role, and having a vastly different view of the use of debt to create prosperity in society.
Labor in the Big Picture
The U.S. has big problems on this front. The country needs to employ more than 2 million new workforce entrants every year. Plus, there are millions who lost jobs in the last three years who still need to be rehired. How does the U.S. deal with challenges like this in a situation of slowing economic growth? The reality is a very difficult employment outlook for current and future U.S.-born workers, especially those with minimal education and skills, and for immigrants with inadequate English fluency.
Conversely, the jobscape looks brighter for the educated and skilled, especially individuals in the fields of computer science, electronic engineering, mathematics, geology, energy science, and oil field engineering. The job market also appears better for individuals in some low-paying retail jobs and other service industries who demonstrate good attitudes and a willingness to work.
The U.S. employment picture is changing and it has become necessary for the labor force to have higher skill and education levels in order to compete. The U.S. still has a comparative advantage over other countries in areas involving technology and skilled labor. The construction jobs that kept so many laborers working for the past two decades are gone. We don’t see them returning for many years. Moreover, there is little unfilled demand for factory workers at high salaries and government employees who receive secure pay and rising benefits.
“We Don’t Control Emerging Markets”
by John Rubino
April 27, 2011
“Keeping inflation low and boosting the economy are good for the dollar over the medium-term.”
Well, duh. But talking about controlling inflation while interest rates are at record low levels and commodities are soaring is pointless. Eventually energy and food prices will work their way through to restaurant menus and store shelves (see McDonalds and Huggies) and then inflation won’t be low — even by the government’s deceptive accounting. That won’t be good for the dollar.
“There’s not much the Fed can do about gas prices per se. After all the Fed can’t create more oil. We don’t control emerging markets. What we can do is try to keep higher gas prices from passing into other prices, creating a broader inflation. Our view is that gas prices will not continue to rise at the recent pace.”
The Fed might not control emerging markets but it does affect them. We’re exporting our inflation to them by supporting US consumer borrowing and keeping interest rates low, which creates a torrent of hot money flowing into Brazil, China and India. That’s why they’re overheating.
Put another way, they’re paying the price for our lack of self-control. China is raising rates and Brazil is at 12% already, which means they’re looking at a combination of slower growth and continued high prices. This is a huge problem for countries where many workers spend most of their paychecks on food and energy.
“The inflationary expectations we’re concerned about are long-term. Our anticipation is that oil prices will stabilize or come down. If firms aren’t passing on higher costs into broader prices, broader inflation, then we’ll feel more comfortable watching and waiting to see how it evolves… Long-term expectations are still stable. We’re confident they’ll stay down.”
Letting inflation run and hoping it doesn’t persist is extraordinarily dangerous, because by the time people figure out that it is going to persist you won’t be able to quickly change their minds. They’ll be dumping their bonds and buying real assets like gold and silver and farmland, sending the dollar down and interest rates up. Then you’ll have to spend years convincing them that they’re wrong by raising short-term rates and engineering a recession. And that’s the optimistic scenario. A recession with home prices already falling and systemic debt at record levels would risk a return to the mid-1930s, when a brief recovery turned into the Great Depression.
“We’re completing purchases by July. It probably won’t have significant impact on markets or the economy because the market already knows that. It’s not the pace of ongoing purchase that matters, but the size of the portfolio we hold. We’ll continue to reinvest, so our portfolio size will remain constant. Any changes to portfolio size would depend on pace of economic recovery.”
What he’s saying is that the Fed will continue to buy up Treasuries and other kinds of debt with the proceeds of its maturing bonds. This is a massive amount of money, hundreds of billions a year, so in effect QE 2 won’t really end.
“All I can say is, recovery is moderate, but I do think the pace will pick up over time. Over the long run, the US will return to being the most productive and dynamic economy in the world. It hasn’t lost any of its basic characteristics.”
Unfortunately the US has lost one of its most basic characteristics: a solid balance sheet. We’re effectively bankrupt, and the resulting loss of flexibility and access to capital will fundamentally change this country in the future. A few pockets of innovation won’t be able to bail out an insolvent majority.
“We’re using new tools, but nothing we’re doing is fundamentally different from what we normally do. We’re monitoring inflation as well as recovery. The problem is the same one central banks always face — which is tightening at the right time of a recovery. But we have a lot of experience with how to do this, and we’ll tighten as conditions warrant.”
Let’s consider that experience…the junk bond bubble of the 1980s, the tech bubble of the 1990s, the housing bubble, and now this, whatever it is. Not reassuring.
Why Bernanke’s next move doesn’t matter
from Phoenix Capital Research
April 27, 2011
THE FINANCIAL WORLD IS SITTING ON THE EDGE of its seat today to see just what Ben Bernanke has to say about inflation. It’s odd that a man with just a horrific track record, not to mention the fact his policies have resulted in tens of thousands of people starving or being killed in riots, should be the focus of the entire financial system.
After all, why should we listen to a pathological liar and idiot, not to mention a man void of morals or compassion? Regardless or Bernanke’s personal qualities, the fact is that it doesn’t matter what he does next. Whether or not he issues QE 3, raises interest rates, references inflation differently, or what have you is irrelevant. We will see some kind of Crisis in the near future because of his policies.
If he raises interest rates, the debt market and derivative implodes. If he launches QE 3, the Dollar collapses and trade wars erupt. If he doesn’t launch QE 3, the stock market collapses.
The idea of “success” is completely off the table at this point. It’s now simply a matter of which Crisis we will see. Even if Bernanke does become hawkish and defends the Dollar, the US’s debt load is beyond sustainable levels and will result in a debt default.
Again, there is no positive outcome from the current financial situation. The only good thing that will come out of the destruction will be the Fed being dismantled and Bernanke no longer in control (though this may take years before it’s complete). One thing that is now certain however, is that the US Dollar will be collapsing in the future. It might take two months (Bernanke indicates QE 3 is coming) or two years (Bernanke becomes more hawkish), but it will happen.
by Martin D. Weiss Ph.D
Posted originally April 25, 2011
NEARLY A YEAR AGO, I PUBLICLY CHALLENGED S&P, MOODY’S AND FITCH to downgrade the long-term debt of the United States government — to help protect investors and prod Washington to fix its finances. In a moment, I’ll show you why their failure to respond is ripping off investors, how it’s exposing millions to a financial atom bomb, and what you can do for immediate fallout protection.
But first, this question: Did S&P finally respond to my challenge last week when it “downgraded” U.S. debt to “negative”? To the casual observer, that might appear to be the case. But in reality, their action — much like recent steps by Washington to “fix” the deficit — was little more than smoke and mirrors. Here are the facts:
• S&P did NOT change, even by one tiny notch, its “AAA” rating for U.S. government debt. It merely changed its future “outlook” for the rating.
• S&P did NOT have the courage to do what’s right for investors and for the country today. It merely said it might do something a couple of years from now.
• Worst of all, S&P has done nothing to change its practices that have caused so much pain for investors in recent years. As before, it’s typically quick to upgrade its best-paying clients, but often delays meaningful downgrades until it’s far too late.
It’s the greatest financial scandal of our time, and the U.S. Government’s Triple-A rating is the most scandalous of all.
• In proportion to the size of its economy, the U.S. government has bigger deficits, more debt, plus bigger future liabilities to Medicare and Social Security than many countries receiving far lower ratings from S&P, Moody’s and Fitch.
• Compared to lower rated countries, the U.S. also has a greater reliance on foreign financing, a weaker currency, and far smaller international reserves.
• The U.S. government is exposed to trillions of dollars in contingent liabilities from its intervention on behalf of financial institutions during the 2008-2009 debt crisis.
• The U.S. Federal Reserve, as part of its response to the financial crisis, may be exposed to significant credit risk.
• The U.S. economy is heavily indebted at all levels, despite recent deleveraging.
• U.S. states and municipalities are experiencing severe economic distress and may require intervention from the federal government.
• The U.S government’s finances could be [will be!] adversely impacted by a rise in interest rates.
• The U.S. dollar may not continue to enjoy reserve currency status and may continue to decline.
• Improper payments by the federal government continue to increase despite the Improper Payments Information Act of 2002.
• The U.S. government had failed its official audit by the Government Accountability Office (GAO) for 14 years in a row, with 31 material weaknesses found in 24 government departments and agencies.
This is no secret. Nor am I citing original facts. They are the same facts that have been written about extensively by Jim Grant, editor of the Interest Rate Observer, brought to light by the U.S. Government Accountability Office and widely publicized by its former chief, David Walker. They are similar to the points made in recent warnings by the International Monetary Fund, the Congressional Budget Office, the European Central Bank, the president’s deficit commission, and even the Big Three Rating agencies themselves.
Published April 20, 2011
WASHINGTON (AP) — The United States has never defaulted on its debt and Democrats and Republicans say they don’t want it to happen now. But with partisan acrimony running at fever pitch, and Democrats and Republicans so far apart on how to tame the deficit, the unthinkable is suddenly being pondered.
The government now borrows about 42 cents of every dollar it spends. Imagine that one day soon, the borrowing slams up against the current debt limit ceiling of $14.3 trillion and Congress fails to raise it. The damage would ripple across the entire economy, eventually affecting nearly every American, and rocking global markets in the process.
A default would come if the government actually failed to fulfill a financial obligation, including repaying a loan or interest on that loan. The government borrows mostly by selling bonds to individuals and governments, with a promise to pay back the amount of the bond in a certain time period and agreeing to pay regular interest on that bond in the meantime.
Among the first directly affected would likely be money-market funds holding government securities, banks that buy bonds directly from the Federal Reserve and resell them to consumers, including pension and mutual funds; and the foreign investor community, which holds nearly half of all Treasury securities. If the U.S. starts missing interest or principal payments, borrowers would demand higher and higher rates on new bonds, as they did with Greece, Portugal and other heavily indebted nations. Who wants to keep loaning money to a deadbeat nation that can’t pay its bills?
At some point, the government would have to slash spending in other areas to make room for any further sales of Treasury bills and bonds. That could squeeze payments to federal contractors, and eventually even affect Social Security and other government benefit payments, as well as federal workers’ paychecks.
A default would likely trigger another financial panic like the one in 2008 and plunge an economy still reeling from high joblessness and a battered housing market back into recession. Federal Reserve Chairman Ben Bernanke calls failure to raise the debt limit “a recovery-ending event.” U.S. stock markets would likely tank — devastating roughly half of U.S. households that own stocks, either individually or through 401(k) type retirement programs.
Eventually, the cost of most credit would rise — from business and consumer loans to home mortgages, auto financing and credit cards. Continued stalemate could also further depress the value of the dollar and challenge the greenback’s status as the world’s prime “reserve currency.”
China and other countries that now hold about 50 percent of all U.S. Treasury securities could start dumping them, further pushing up interest rates and swelling the national debt. It would be a vicious cycle of higher and higher interest rates and more and more debt.
by Chris Martenson
Posted originally April 19, 2011
THINGS ARE CERTAINLY SPEEDING UP, AND IT IS MY CONCLUSION that we are not more than a year away from the next major financial and economic disruption. Alas, predictions are tricky, especially about the future (credit: Yogi Berra), but here’s why I am convinced that the next big break is drawing near.
In order for the financial system to operate, it needs continual debt expansion and servicing. Both are important. If either is missing, then catastrophe can strike at any time. And by ‘catastrophe’ I mean big institutions and countries transiting from a state of insolvency into outright bankruptcy.
In a recent article, I noted that the IMF had added up the financing needs of the advanced economies and come to the startling conclusion that the combination of maturing and new debt issuances came to more than a quarter of their combined economies over the next year. A quarter!
I also noted that this was just the sovereign debt, and that state, personal, and corporate debt were additive to the overall amount of financing needed this next year. Adding another dab of color to the picture, the IMF has now added bank refinancing to the tableau, and it’s an unhealthy shade of red:
(Reuters) – The world’s banks face a $3.6 trillion “wall of maturing debt” in the next two years and must compete with debt-laden governments to secure financing, the IMF warned on Wednesday. Many European banks need bigger capital cushions to restore market confidence and assure they can borrow, and some weak players will need to be closed, the International Monetary Fund said in its Global Financial Stability Report.
The debt rollover requirements are most acute for Irish and German banks, with as much as half of their outstanding debt coming due over the next two years, the fund said.
“These bank funding needs coincide with higher sovereign refinancing requirements, heightening competition for scarce funding resources,” the IMF said. When both big banks and sovereign entities are simultaneously facing twin walls of maturing debt, it is reasonable to ask exactly who will be doing all the buying of that debt? Especially at the ridiculously low, and negative I might add, interest rates that the central banks have engineered in their quest to bail out the big banks.
Greece’s Public Debt Management Agency paid a high price to sell €1.625 billion of 13-week Treasury bills at an auction Tuesday, amid persistent speculation that the country will have to restructure its debt.
The 4.1% yield paid by Greece, which means it now pays more for 13-week money than the 3.8% Germany currently pays on its 30-year bond, is likely to increase concern over the sustainability of Greece’s debt-servicing costs. Greek debt came under heavy selling pressure Monday after it emerged that the country had proposed extending repayments on its debt, pushing yields to euro-era highs.
Greek two-year bonds now yield more than 19.3%, up from 15.44% at the end of March.
With Greek 2-year bonds now yielding over 19%, the situation is out of control and clearly a catastrophe. When sovereign debt carries a rate of interest higher than nominal GDP growth, all that can ever happen is for the debts to pile up faster and faster, clearly the very last thing that one would like to see if avoiding an outright default is the desired outcome. How does more debt at higher rates help Greece?
It doesn’t, and default (termed “restructuring” by the spinsters in charge of everything…it sounds so much nicer) is clearly in the cards. The main question to be resolved is who is going to eat the losses — the banks and other major holders of the failed debt, or the public? I think we all know the most likely answer to that one.
“Contagion” is the fear here. With Ireland and Portugal already well down the path towards their own defaults, it is Spain that represents a much larger risk because of the scale of the debt involved. Spain is now officially on the bailout watch list, because it has denied needing a bailout, which means it does.
Spain is now at the ‘grasping at straws’ phase as it pins its hopes on China riding to the rescue:
European officials are hoping that the bailout for Portugal will be the last one, and debt markets have broadly shown both Spain and Italy appear to be succeeding in keeping investors’ faith.
Madrid is hoping for support from China for its efforts to recapitalize a struggling banking sector and there were also brighter signs in data showing its banks borrowed less in March from the European Central Bank than at any point in the past three years.
If Spain is hoping for a rescue by China, it had better get their cash, and soon. As noted here five weeks ago in “Warning Signs From China,” a slump in sales of homes in Beijing in February was certain to be followed by a crash in prices. I just didn’t expect things to be this severe only one month later:
BEIJING (MNI) – Prices of new homes in China’s capital plunged 26.7% month-on-month in March, the Beijing News reported Tuesday, citing data from the city’s Housing and Urban-Rural Development Commission. Average prices of newly-built houses in March fell 10.9% over the same month last year to CNY19,679 per square meter, marking the first year-on-year decline since September 2009.
Home purchases fell 50.9% y/y and 41.5% m/m, the newspaper said, citing an unidentified official from the Housing Commission as saying the falls point to the government’s crackdown on speculation in the real estate market.
Housing transactions in major Chinese cities monitored by the China Index Research Institute (CIRI) dropped 40.5% year-on-year on average in March, a month when home buying typically enters a seasonal boom period.
Transactions rose month-on-month in 70% of the cities monitored, including five cities where transactions were up by more than 100% on a month earlier, secutimes.com reported on Wednesday, citing statistics from the CIRI. [CM note: month-on-month not useful for transactions as volumes have pronounced seasonality]
Beijing posted a decrease of 48% from a year earlier; cities including Haikou, Chengdu, Tianjin and Hangzhou saw drops in their transaction volumes month-on-month, according to the statistics. Meanwhile, land sales fell 21% quarter-on-quarter to 4,372 plots in 120 cities in the first quarter of 2011; 1,473 plots were for residential projects, the statistics showed.
The average price of floor area per square meter in the 120 cities dropped to RMB 1,225, down 15% m-o-m, according to the statistics.
Real estate is easy to track because it always follows the same progression. Sales volumes slow down, and people attribute it to the ‘market taking a breather.’ Then sales slump, but people say “prices are still firm,” trying to console themselves with what good news they can find in the situation. Then sales really drop off, and prices begin to move down. That’s where China currently is. What happens next is also easy to ‘predict’ (not really a prediction because it always happens), and that is mortgage defaults and banking losses, which compound the misery cycle by drying up lending and dumping cheap(er) properties back on the market.
by Greg Hunter
Originally posted 15 April 2011
THIS WEEK, PRESIDENT OBAMA GAVE A SPEECH OUTLINING his plan for long term deficit reduction. He invited the Republican leadership for what many thought would be some sort of bi-partisan federal budget 2011 solution. In reality, it was kind of a St. Valentine’s Day massacre because right off the bat, Mr. Obama pulled out the Presidential tommy-gun and started shooting. He said, “This debate over budgets and deficits is about more than just numbers on a page, more than just cutting and spending. It’s about the kind of future we want. It’s about the kind of country we believe in.”
Surprise, surprise. The kind of country President Obama “believes in” is a lot different than the Republicans. The President said the Republican plan “ends Medicare as we know it.” Sounds to me the President will play the class warfare card during the 2012 election season because he went on to say, “The top 1% saw their income rise by an average of more than a quarter of a million dollars each. And that’s who needs to pay less taxes?” (Click here to read the entire text of the President’s deficit speech.) I can see why the President is playing to lower income people. Recently, a poll revealed a majority of the poorest Americans no longer support Obama. CNSNews.com reports, “President Barack Obama’s approval among the poorest Americans dropped to an all-time low of 48 percent last week, according to the Gallup poll, leaving the president with less-than-majority approval among all income brackets reported in Gallup’s presidential approval surveys.” (Click here to read the complete CNSNews.com story.)
The two big issues will be billions in Medicare and Medicaid cuts (especially Medicaid) and a $1 trillion tax increase. I see these two issues as real sticking points. Relative to the Republican plan, the President only wants to make small changes to health care entitlements. Obama clearly wants health care entitlements to grow, not shrink (remember Obamacare?) Also, the Democrats and Republicans came within an hour of shutting down the government over $38 billion in cuts.
There is no way the two parties are going to agree on some compromise on a trillion bucks in tax hikes. These two issues alone spell budgetary gridlock. House Budget Chairman Paul Ryan said the President’s speech was “excessively partisan” and “dramatically inaccurate.” These are not the kind of words you use when you are laying the groundwork for a compromise. I am sure Congress will play chicken again, over the budget, in the government shutdown game.
I don’t know which party has the best plan, but I do know the U.S. is in deep financial trouble. Gridlock is not going to help with dramatic and badly needed cuts in spending. In March alone, the federal government spent 8 times more money than it took in. The U.S. collected $128 billion and spent more than $1.1 trillion (or $1,100 billion!) Neither party addressed the other new welfare plan we have started for crooked bankers who have ripped-off the country and caused the financial meltdown in 2008. The latest outrage is the $220 million in bailout money given to the wives of two Morgan Stanley bankers. (Click here to read the complete story.)
by Gordon T. Long
of Tipping Points
Posted originally April 21, 2011
Chairman Bernanke has placed himself in a box. It is not a box of his choosing, but rather the result of his misguided economic beliefs, use of flawed statistical data, geo-political events occurring during his watch, poor decisions and a penchant for political pandering. Some of these may be requirements for academia success but not for leading global financial markets during turbulent times.
It is time for Professor Bernanke to return to the collegial setting of Princeton University while the world still has time to correct the path he has mistakenly set us on.
I was angry during most of former Chairman Greenspan’s tenure because of his persistent use of liquidity pumping to solve every problem from Y2K to the Peso crisis. Greenspan’s inability to see a bubble two inches from his nose and yet still pontificate about irrational exuberance, rather than taking the punch bowl away from the party, incited me. Bernanke does not affect me that way. He simply disappoints and leaves a taste like eating dry shredded wheat, with the hope of a child, to eventually get the prize at the bottom of the box.
Character flaws show during times of stress. Honesty, integrity, value systems and beliefs are put to test and are highlighted under the public media microscope. I’m sure Chairman Bernanke is a nice guy, loved by his family but he is missing a backbone. On April 27th, 2011, that will become obvious to all.
On April 27th, 2011 the Federal Open Market Committee (FOMC) issues its next decision and statement regarding the future of Quantitative Easing (QE) II. Though previously announced to officially end June 30th, 2011 there are serious questions if this is still a viable option.
This particular meeting is the ‘signal’ meeting that the financial community will be looking for to assess risk and strategy. Many (including myself) have already concluded what the outcome will be and are preparing accordingly. On this date Bernanke will hold the first ever press briefing by the Federal Reserve, in addition to releasing forward forecasts which are usually held another 3 weeks. It is going to be an exciting event.
Unfortunately, Chairman Bernanke is going to disappoint!
THE BERNANKE BOX
Let’s summarize the box Bernanke presently finds himself in.
Interest rates have been artificially suppressed for such a long time that no matter what Bernanke does come June, interest rates will likely begin rising. Therein lies the problem for the Fed. Any further debt monetization by the central bank is now becoming counterproductive. If Bernanke enacts another iteration of Quantitative Easing, the Fed may find itself the only player in the bond market. According to my analysis this is nearly the case already.
The truth is that only a central banker can afford to own bonds that are yielding rates well below inflation, and growing even more so. The lower real interest rates become, the less participation there will be in the bond market from private sources. If you don’t believe me, ask PIMCO, the world’s largest Bond fund who is not only out of US Treasuries but selling short. China has been a net seller of US Treasuries since October. Besides the Fed, who is willing to buy the $1.65 Trillion in fresh new US debt paper?
So if Bernanke extends QEII we have a collapse in the US$ and a complete lockout of auction buyers. If they stop QE II, interest rates go through the roof immediately and the US government with short duration paper has an immediate and serious fiscal funding gap.
Bernanke is in a Box!